The Bloomberg Terminal Stands On The Precipice

Jay Yarow

Feb. 27, 2009, 8:12 AM

Bloomberg News has been feted with gushing features about its brilliance two years in a row now. Fortune in 2007 and Vanity Fair in 2008 fawned over the financial data company's growth, particularly its ability to hire more journalists. In an era of bankrupted newspapers, any journalistic organization hiring more people is newsworthy.

While the story for 2007 and 2008 certainly was Bloomberg, it won't be the story for 2009. That distinction will go to its rival, Thomson Reuters. And if Bloomberg isn't careful, the story will last much longer than that. Bloomberg is rushing headlong into expanding and improving its news operations. Its unassuming website and unwatched television networks are due for a tune up by new Internet, radio and television chief, Andy Lack. It's a good idea to improve lagging parts of the operation; it's just bad timing for such a move. Trust us, news sites aren't cash cows. And ask Fox how easy it is pry the attention of people away from CNBC.

At the same time that Bloomberg directs its resources towards news operations, the part of its business that actually makes money faces rough times. Bloomberg L.P. is almost entirely built on the back of its 290,000 data terminals that cost between $1,500 and $1,800 monthly. But with financial firms cutting head count, terminal sales will likely drop. There's no point in keeping a data terminal if there's nobody to man it. We saw an early indication of this last year. Between June 2007 and March 2008 there were 34,000 job cuts by Wall Street banks. By the end of the year Bloomberg saw a drop in net sales of 1,100. That equates to losing almost $20 million in revenue. While the company is still minting cash, this troubling trend won't reverse anytime soon. Meanwhile, Thomson Reuters, who is not encumbered by terminals, just turned in a killer quarter. Net income was $656 million on $3.4 billion in revenues. It raised its dividend by 4 cents a share and its 2008, free cash flow was $1.8 billion. The company also raised its 2009 expectations. It's 2008 operating profit was $1.9 billion, compared to Bloomberg's estimated $1.5 billion, though Bloomberg has a much higher margin.

Tom Glocer, Thomson Reuters CEO, told the FT that business with Lehman Brothers was picked up by Barclays and Nomura, while the mainly fixed-income business at Bear Stearns shifted to JPMorgan Chase. He also added that as long as Citi and BofA don't collapse (no guarantees there) revenue would continue to grow. There's a good chance the same could happen for Bloomberg. After all, Merrill doubled its terminal contract after being acquired by BofA. When Merrill sold its 20% stake in Bloomberg back to Bloomberg, the data company wrote into the contract that Merrill would have to double its terminal contracts if acquired.

However, Bloomberg only sells one product at one price. If a financial company needs to reorder its balance sheet, it might consider a new provider of information.

Thomson Reuters sells a diverse set of products at a diverse set of prices. We've also been told from a Thomson Reuters source that demand for their developer tools and software has gone up ten-fold. It recently closed two of its biggest software sales ever. When the market is acting as unpredictably as it is, there is a premium for great data. It can sell terminals for half the price of Bloomberg, but that's not what it does. Thomson Reuters sells data and technology. Bloomberg, though, is stuck with its terminals. Maybe they're as addictive as heroin, but in this environment, methadone will do have to serve as a replacement. Bloomberg signs its clients up for two-year contracts, so it will still get some money even if it loses customers. Of course there are perils in this too.

From Fortune: Of course, there are occasional situations in which some customer goes out of business and Bloombergs are a casualty. In a case like that, the immediate financial hit to Bloomberg LP is mild, given that it has been paid quarterly in advance. But Bloomberg is stung nevertheless, because the customer won't be finishing out whatever remains of its two-year contract, probably won't be paying the "breakage fee" that is supposed to apply to contract terminations, and won't be signing up for a new contract. All of that, for example, describes Amaranth Advisors, a $9.5 billion hedge fund that went calamitously out of business last fall, losing $6.4 billion for its investors. At death, it had 221 Bloombergs worldwide. Those were in effect returned to Bloomberg LP, except that the company has a policy of letting any user who loses his job have a Bloomberg at home for four months - free of charge - while he tries to get hired somewhere else. By January, most of the Amaranth employees had indeed taken new jobs and were once again re-equipped with Bloombergs. So Grauer was then measuring his Amaranth loss as amounting to only 41 terminals, which struck him as bearable. Besides that, the electronic sign hanging near his desk and keeping tabs on net installs was proclaiming that the company was having a fine start to the year. That sales picture could change quickly. Despite Bloomberg's ever-blooming drive to broaden its customer base - to become a staple at law firms, for example - the company is cyclically tied to the financial world.

Admittedly, talking about the future of Bloomberg is tough. It is a tight-lipped private organization that doesn't have to disclose business plans. A source at the company tells us that its revenue will be fine this year, and that it doesn't really care what people say. Though we hear from an outside source that Bloomberg is hiring more people for data sales.

If this is true, it signals a welcome shift in Bloomberg's business away from terminals (and news) towards something that can protect them from the wolfpack nipping at its heels.